By Jennifer Kho

Piper Jaffray said Monday it has closed a $60-million fund of venture-capital cleantech funds for institutional investors, another sign of maturity for an industry previously on the investment fringe.

The investment bank put the money into cleantech funds at Draper Fisher Jurvetson, VantagePoint Venture Partners, and Nth Power, among others, and says it has a “commitment pending” at Technology Partners, said Scott Barrington, director of private equity at Piper Jaffray.

The Piper Jaffray fund is one of the first handful of so-called “funds of funds” in cleantech, joining banks such as Robeco, Goldman Sachs, and the Credit Suisse Group. Funds of funds allow institutional investors to diversify by investing in a portfolio of cleantech funds, each containing their own portfolios of cleantech companies.

The Piper Jaffray fund represents market recognition that cleantech is becoming mainstream, said David Lincoln, a founder and managing partner for DFJ Element, Draper Fisher Jurvetson’s cleantech fund.

“When you see a fund of funds, that’s usually the second phase of investment,” he said. “The first phase is people who believe in an idea and invest directly. When a sector starts to get more validation it gets to a fund of funds, because smaller firms say ‘Gee, I’d like to invest there, but don’t have the resources to choose a fund.’”

So far, Piper Jaffray has committed 80 percent of the fund, and expects to invest in a total of seven or eight funds, Mr. Barrington said.

It launched originally targeted a $25-million fund, and the fund was still oversubscribed at $60 million, said Danny Zouber, a principal of private capital at Piper Jaffray.

“We have several investors that had been looking at being potential [investors] in a specific cleantech fund then got word of us,” he said. “They are much more comfortable with a thoughtfully constructed diverse fund of funds that taking a rifle-shot approach.”

The team selected funds with a broad diversity of stages and industries, looking for good exposure to alternative energy, water, and advanced materials, he said.

For example, DFJ focuses on next-generation technologies, instead of incremental improvements, at all stages, while VantagePoint favors later-stage investments with companies approaching full-scale production in $1-billion-plus potential markets.

Mr. Barrington said the Piper Jaffray fund of funds downplays solar power and biofuels investments.

“It’s a little too late to be investing in solar right now,” he said. “With probably 200 companies in the portfolio, there are probably only two or three solar plays. It’s the same with bioethanol; that wave is a little bit behind us now. We’re seeing follow-on rounds showing two to three times step-ups, and that shows it’s a little too late to be putting money in headline-attracting spaces.”

The bank also focused on so-called “pure play” funds that focus specifically on cleantech and have expertise in the sector, rather than on larger brand-name venture firms, Mr. Barrington said.

“Eventually, clean technology will be a mainstream investment sector for the brand-name venture firms, but we see them right now in the steeper part of the learning curve on clean technology,” Mr. Barrington said. “Many are still a couple of years away from having the same level of expertise and experience as the existing pure play cleantech managers do today.”

While the amount of money isn’t huge, being selected for such a fund also will make it easier for DFJ Element to attract more funding in the future, Mr. Lincoln said.

“It certainly makes our investors feel better,” he said. “People feel more comfortable if they see other people in leading firms writing checks in this area.”

Mr. Lincoln said he expects more funds of funds will follow. “People are starting to realize this is not some fad or a small sector,” he said. “That’s why you’re starting to see mainstream, big-brand-name firms dedicate money to this.”

The new cleantech funds are bringing experienced co-investors to the market, helping with follow-on rounds and ideas to help DFJ’s portfolio companies succeed, he said.

Of course, all the money streaming into cleantech is also bringing more competition.

“It’s a double-edged sword,” Mr. Lincoln said. “More competition is certainly starting to push prices up.”

Like Mr. Barrington, Mr. Lincoln said he is seeing unrealistic valuation levels that don’t make sense in some hot areas, such as solar and biofuels.

“We will look elsewhere in other sectors until the reality of the markets bring those prices down,” he said. “We’re seeing some prices paid for very-early-stage companies that I don’t believe provide the same opportunities for return. I’d love to be proven wrong.”

In the meantime, Stephan Dolezalek, a managing director who heads the cleantech practice group at VantagePoint Venture Partners, said VantagePoint is the fifth-largest U.S. investor in new ethanol production, and is also investing in solar, among many other categories.

While solar and biofuel deals “tend to be where new money goes first,” VantagePoint gets around the competition by investing outside of the U.S., where there is less competition, he said.

Despite higher valuations for some deals, the Piper Jaffray team scoffed at the idea that there might be too much money being invested in the sector.

“It’s still a very undercapitalized, underfunded industry,” Mr. Barrington said. “I’ve seen stories about $1 billion of investment, and $1 billion is a drop in the bucket. Cleantech is just now coming of age. We’re very bullish on clean technology right now as a sector to generate outsized returns.”